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Spend More, Get More In Tech R&D? Not Always, According To Innovation Study

Booz Allen Hamilton examined research and development at 1,000 global companies for six months and found less than one-tenth were getting full value from money spent.

Why do some high-tech companies get great bang for their R&D dollars while others seem to get very little?

To answer that and other questions, a team at Booz Allen Hamilton examined research and development at 1,000 global companies for six months and found less than one-tenth were getting full value from money spent. Several household names in high tech are included in the report, titled Smart Spenders, released this week.

Led by chief investigator Barry Jaruzelski, a Booz Allen VP, the team sought to find the key, if any, to the attributes that lead to innovation at companies.

"We tortured the data," says Jaruzelski, observing that 10,000 separate analyses were performed. "People think there are predictable black boxes out there. They think if you put money in, innovation comes out. If only it worked that way," he says.

While high-tech firms with winning innovation strategies approach R&D with different tactical methods, they employ a major standard that seems to work for all: a deep understanding of customer needs, says Jaruzelski. They also used an end-to-end multifunction process in developing products, he says.

Booz Allen segmented the top performers, called high leverage innovators, into a group of 94 of the 1,000 firms studied. The usual suspects were included— Apple Computer, eBay, Google, Research in Motion, and Yahoo—but some younger companies like Asustek Computer and SanDisk also made the cut.

Industry kingpins Microsoft and IBM, meanwhile, didn't make the select group, but Jaruzelski says that didn't mean they weren't innovative. The study found, for instance, that Microsoft's 2005 R&D budget dropped 20% from the previous year. That knocked the company out of the top spending position in 2004 to the No. 8 position. Ford Motor nailed down the No. 1 spending position in 2005.

So, who's getting the most bang for its R&D buck among high-tech firms?

"The poster child is Apple," says Jaruzelski. "Its core of success has been to create simplicity on the other side of complexity. Apple is clearly world class as far as understanding users." Senior management involvement, most famously in the case of Apple CEO Steve Jobs, in the conception and definition of new ideas is critical, says Jaruzelski.

Jaruzelski also noted that Apple seems to understand the limits of its R&D resources and realizes that it can only make a few big innovation bets. Other high-leverage innovators—he mentioned Samsung and Sony—can afford to make many bets on innovative new products and services.

The report cited Google, too, noting that much of its innovation bubbles up from its rank-and-file engineers, who are encouraged to spend up to 30% of their time dreaming up new ideas.

"Some ideas have moved more slowly at the development or commercialization stages than other ideas, but the integrated nature of the whole Google portfolio caries the momentum of ideation forward," Jaruzelski says.

The study also discussed SanDisk and its unusual challenge to develop products in the face of constantly plunging prices of flash memory. Booz Allen found that SanDisk's bottom-line performance stemmed from its "frugal management culture" that enabled the lean operation to move quickly to take advantage of falling prices. The firm's Sansa music player was developed from that vantage point.

In explaining the success of the high leverage innovators, the study placed an "innovation value chain" across its findings. The end-to-end process starts with a clear strategy for innovation seasoned with a strong understanding of customers. The process moves through the linkage of R&D projects and tools, all the while working to eliminate bottlenecks and translating customer requirements to product design. At the conclusion of the process, sales and marketing also come into play, just as it had at the beginning.

The best innovators, Jaruzelski says, "all viewed innovation as an end-to-end process."

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